Diamondrock Hospitality Co (DRH) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to DiamondRock Hospitality's second quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Claire Koeneman with the Financial Relations Board. Please go ahead.

Thanks so much and welcome, everyone. The press release and supplemental disclosure package were distributed this morning as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available on the company's Web site at www.diamondrockhospitality.com in the Investor Relations section. Additionally, we're hosting a live Web cast of today's call, which you can also access in that section.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although DiamondRock Hospitality believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today's release and from time to time in the company's filings with the SEC. Finally, the company does not undertake a duty to update these forward-looking statements.

Having gone over all of that, I'd now like to welcome management. With us today we have Bill McCarten, chief executive officer, John Williams, chief operating officer, and Mark Brugger, chief financial officer. So without further ado, I'll turn the line over to Bill McCarten for his opening remarks. Bill?

Thank you, Claire, and thank you for handling all of that. Good afternoon, everyone, and welcome to DiamondRock Hospitality's initial quarterly earnings conference call. In looking over the participation list for today's call, we recognize a number of people who we met on our recent road show. We also noted a number of people who may be learning about DiamondRock Hospitality for the first time. To all I offer thanks for helping make our IPO and first weeks as a public company so successful. Since selling nearly 30 million shares at $10.50, just over two months ago, our stock price has increased by about 15% and we continue to receive enthusiastic feedback from all of our stakeholders in the early going.

Since this is our first quarterly earnings call, I'll take a moment to provide a general overview of DiamondRock before covering the highlights for the quarter. Mark will then review our second quarter financial performance in greater detail and provide guidance for the remainder of the year. John will finish up by discussing our hotel properties, their performance and our renovation plans.

DiamondRock is a lodging real estate investment trust that was formed in the spring of 2004. We began operations as a blind pool last summer after completing a $210 million private equity offering. We completed our initial public offering in May 2005, raising a total of $315 million. In just over one year we have acquired 14 hotels for an aggregate investment, including planned renovations, of $875 million.

Our investment strategy is to acquire hotels in the upper upscale full service hotel segment and, to a lesser extent, urban select service properties. We intend to create a portfolio that balances stable properties with value add acquisition opportunities and we will focus primarily on high-barrier-to-entry markets. Our objective is to create an asset base of high quality hotels that will consistently deliver premium returns compared to our peers, including a very competitive dividend.

Assisting us in that endeavor, we have an investment sourcing relationship with Marriott International that provides DiamondRock with a first look at most acquisition opportunities over which Marriott has influence or control. It's important to point out that no other company gets this first-look opportunity. About 50% of our 14 hotel acquisitions benefited from this relationship, including several off-market transactions. We believe that the sourcing relationship is a primary source of differentiation and a clear competitive advantage to us.

The characteristics of our portfolio and our performance during the first half of 2005 suggest that we are achieving our objectives. It is geographically diverse and is concentrated in high-barrier-to-entry markets and is well positioned to leverage the lodging recovery.

RevPAR was $108 and occupancy was nearly 75% during the first half, which compares favorably with our peer group. We've created a strong balance sheet and are paying a solid dividend. We anticipate paying an annualized dividend of $0.69 a share, or roughly 5.8%, at a $12 stock price.

During the first half of the year our performance was outstanding. For the seven hotels we owned as of the end of the second quarter, RevPAR increased 13% and flow-through was excellent with hotel EBITDA margins increasing 370 basis points. Our two New York Courtyard hotels led performance through a combination of the strong New York market recovery and extremely positive operating lift from the conversion of Hotel 5A in Manhattan to a Courtyard.

We expect year-over-year RevPAR to moderate during the second half of 2005 as we undertake significant renovation projects at our Fifth Avenue Courtyard and at our Torrance and LAX Marriott hotels. For the full year we expect that RevPAR will increase 8 to 10% and margins will increase by over 200 basis points, despite the impact of these renovations. Overall, our hotel portfolio is performing in line with our acquisition pro formas.

Starting from a blind pool a little over a year ago, we have accomplished a lot. We will continue to grow our company by leveraging our Marriott relationship as well as our own industry contacts and by following a disciplined acquisition evaluation process. At the same time, with the creation of a significant hotel asset base and efficient capital structure, we will focus even more on proactive asset management activities. For additional color on our financial picture, I'll now turn the call over the Mark. Mark?

Thank you, Bill. For anyone familiar with the process, completing an IPO is a challenging task. That we did so while also delivering on a number of other major initiatives, speaks volumes about the talent and energy of our assembled team. The IPO closed on June 1st, and we issued a total of 29.8 million shares. This resulted in net proceeds to the company of about $289 million.

Now looking at the balance sheet, we had $658 million of total assets at the end of the quarter, including cash of $273 million. On the debt side, we used a portion of the IPO proceeds to take $64 million of debt off of our balance sheet, paying off the outstanding loans secured by the Torrance Marriott and Sonoma Renaissance. In total, we had about $157 million of total outstanding debt at the end of the second quarter with an average interest rate of about 5.7% and the average weighted maturity of seven years. Approximately 85% of this debt is fixed rate and represents 25% of the investment in our hotels plus cash on hand at the end of the quarter.

I'll now review some of our financial performance highlights for the second quarter. Total revenue in the quarter for the seven owned hotels was $33.5 million, RevPAR was $121, which was a 14% increase over the same quarter last year. Occupancy grew by 1.9%, and average daily rate grew by 11.4%. Adjusted EBITDA hotel operating margins in the quarter increased 260 basis points to 29.4%. EBIDTA in the quarter was $2.6 million with adjusted EBITDA of $8 million.

Our adjustments reflect two items which we believe are not indicative of our financial performance in the quarter. The first is straight-line ground rent. Some of our hotels are situated on ground that is leased to us. Accounting rules require that we straight-line, or average, the pre-established ground rent due under a lease over its term and expense that amount rather than the cash amount due. Because some of our ground leases had very long terms, as much as 99 years, the compounding effect leads to a large non-cash number. In the second quarter we paid $417,000 in cash ground rent, but we were required to expense $2 million in straight-line ground rent. We adjust for the non-cash portion of the ground rent expense.

The second adjustment is for an IPO-related expense. In connection with the initial public offering, there was a one-time cost that we expensed in the second quarter. It was a stock grant to management which vested immediately but had a five-year restriction on sale. This grant resulted in a second quarter non-cash expense of approximately $3.7 million. We adjust for this expense.

On a historical basis, we generated a loss of $1.5 million of funds from operations, or FFO. However, making the same adjustments discussed above, our adjusted FFO was $3.8 million, or $0.13 per diluted share for the second quarter. In the quarter we also paid a dividend of $0.326 per diluted share.

There are a number of recent events for DiamondRock. Since the end of the second quarter we completed the acquisition of seven additional hotels for approximately $475 million. These include the Los Angeles Airport Marriott, the Renaissance Worthington, the Atlanta Alpharetta Marriott, the Marriott Frenchman's Reef and Morning Star Resort, the Vail Mountain Marriott Resort, the Buckhead SpringHill Suites by Marriott, and the Oak Brook Hills Resort & Conference Center, which was converted last weekend to the Oak Brook Hills Marriott Resort.

In connection with the above acquisitions, the company placed secured loans on three of the hotels -- the Marriott LAX, the Worthington Renaissance Hotel, and the Marriott Frenchman's Reef and Morning Star Resort. Collectively, these loans have a principal balance of $202.5 million, terms of 10 years, bear interest at a fixed rate of 5.4% and have interest-only periods of three to 10 years. All the loans are non-recourse and not cross-collateralized, which provides greater flexibility to sell an individual asset in the future.

Additionally, we further enhanced our capital flexibility by entering into a three-year secured -- senior secured credit facility led by Wachovia, Citigroup and Bank of America. The facility is for $75 million and is expandable to $250 million with lender consent. Outstanding amounts on the lines are interest at LIBOR plus 145 basis points as long as corporate leverage stays below 65% debt to asset value. We currently have $70 million undrawn and available on the line.

Now, it's our corporate policy to target a debt level of 45 to 55% of our asset value. After all the recent acquisitions and financings, our current debt level is about 40% of asset value. Consequently, we have remaining investment capacity for roughly $150 million of acquisitions using the middle of our target range.

Now turning to guidance. For the full year 2005, the company expects same-store RevPAR to increase in the range of 8 to 10%. For the third quarter of 2005, we estimate same-store RevPAR growth of 6 to 8%. The company expects full year hotel adjusted EBITDA operating margins to increase by approximately 210 to 230 basis points. The RevPAR and adjusted hotel EBITDA margin guidance is pro forma and assumes the company owned 12 of our 14 hotels as of January 1st, 2005.

It excludes the historical and forecasted results for the Buckhead SpringHill Suites and Oak Brook Hills Marriott Resort. The Buckhead Suites -- SpringHill Suites is excluded, as it was first opened on July 1st, 2005, and has no historical results for any prior period. Oak Brook Hills Marriott Resort is excluded as we consummated the purchase of that hotel last Friday, July 29th, and our financial audit will not be complete until later this month.

For our ownership period of the portfolio of all 14 hotels, we estimate that for the full year 2005 adjusted EBITDA will be in the range of $43 to $46 million, FFO will be in the range of 13.5 to $16.5 million, adjusted FFO will be in the range of 24 to $27 million. Based on our current outstanding diluted share count of 51.9 million shares, the full year adjusted FFO will be $0.46 to $0.52 per diluted share.

Now, the company estimates that for the third quarter of 2005 adjusted EBITDA will be in the range of $12 to $14 million, FFO will be in the range of $5.4 to $7.4 million, and adjusted FFO will be in the range of $7 to $9 million. Adjusted FFO per diluted share is expected to be $0.13 to $0.17 per share. We anticipate paying a quarterly dividend of $0.1725 per share. And additionally, in the third quarter we will complete the $6 million renovation of the Courtyard New York Fifth Avenue.

We estimate that the disruption from this renovation lowered overall third quarter RevPAR guidance by a little more than 100 basis points. In short, we feel very good about our results, the overall lodging market and our portfolio in particular, which John will now discuss further. Now I'd like to turn it over to John Williams, our chief operating officer. John?

Thanks, Mark. As Bill indicated, we're very pleased with the overall quality and potential of our hotel portfolio. I'll take a few minutes to talk more about our hotel properties, their performance and our renovation plans. I'll also talk about the acquisition environment, our pipeline and the benefits of our sourcing relationship with Marriott.

Our 14-hotel portfolio is both balanced and diversified. We have a good mix of stable and high growth potential hotels. We consider four hotels in our portfolio to have a very high growth potential. Six others we feel have demonstrated history of stable EBITDA and exciting internal growth prospects. And four of the hotels have stable EBITDA history and moderate growth potential.

Our hotel in Chicago, Oak Brook Hills, is a conversion from an undercapitalized and under-marketed independent and will provide significant internal growth, as will our new-built hotel in Atlanta, Buckhead. The Sonoma Renaissance continues to establish itself in a recovery market and we expect it to continue its dramatic EBITDA growth, which is projected to be 25% in 2005. Our Torrance hotel will benefit from the capital repositioning plan for Q4 2005 and Q1 2006, as well as the dramatic redevelopment of the Del Amo Mall across the street.

Our properties in Vail, LAX, the Virgin Islands, New York and Alpharetta have a demonstrated history of stable cash flow as well as exciting growth potential. Our hotels in Salt Lake City, Lexington, Fort Worth and Bethesda have a solid track record of consistent EBITDA with moderate growth potential.

Generally, our portfolio is located in primary markets with high-barriers-to-entry. For example, over 47% of our rooms are located in New York City, Washington D.C., Chicago and Los Angeles markets and we enjoy good overall geographic diversity. We are already represented in eight of the top 25 markets as defined by Smith Travel Research.

With the recent addition of the Oak Brook Resort, we now have five resort properties representing about 30% of our rooms. For the first half of the year, our pro forma RevPAR for the 12 comparable hotels was $114, positioning DiamondRock quite favorably within its peer group. Our mix of business is well balanced as well, at about 68% transient, one-half of which is corporate, and 32% group, also about one-half corporate. Our 12-hotel portfolio enjoys an average RevPAR index of 125% year-to-date through June. That excludes the Frenchman's Reef Resort because of some non-reporting competition.

As we expand our portfolio, we have some gaps that we would like to fill. For example, we would like to grow the extended-stay and group association components of our portfolio segmentation. We would also like to continue to concentrate on the top 25 markets.

The performance for the 12 comparable hotels on a pro forma basis for the first half of the year was outstanding. Pro forma first half RevPAR increased 11% and EBITDA hotel margins increased 260 basis points. The strong performance of our New York Courtyard hotels led the pack with RevPAR increasing 22% and margins up 990 basis points. We benefited both from the strong New York market recovery and the very significant and immediate operating uplift resulting from the conversion of the Hotel 5A to a Courtyard where RevPAR increased over 50% in the first half.

The New York market recovery began in earnest in the fourth quarter of 2004, so our New York hotels will be facing more difficult comparisons in the fourth quarter. EBITDA at our Griffin Gate Resort was up 23% over first half 2004.

Now, we're not without challenges. The Bethesda Suites Hotel's RevPAR growth was only 6.3% during the first half and below our expectations because they were unable to fully replace contract rooms given up in an attempt to increase rate. The hotel has also been impacted by a new Marriott Conference Center hotel in the market that appears to be taking more transient volume than anticipated. As a result, margin growth is also below expectation. Now, Bethesda does appear to be back on budget so far in Q3 and we expect the new Marriott Conference Center to group up as it stabilizes.

The Salt Lake City RevPAR growth for the first half at 6.6% is below our expectation due primarily to slightly lower rates. The second half of the year appears to be on track with our expectations. Our food and beverage growth is lagging RevPAR growth for a variety of reasons, which we're addressing with property management.

Finally, our very strong RevPAR growth in the first half will moderate in the second half for several reasons. Most importantly, three significant renovation projects will be underway during the rest of the year. Overall, these projects will depress consolidated RevPAR growth by about 100 basis points in the third and fourth quarters.

Now I'll spend a few minutes reviewing the scope and timing of the more significant renovation projects that are being undertaken over the next year. In total, we will spend about $50 million repositioning our hotels during 2005 and 2006. At Fifth Avenue we are underway with a $6 million rooms renovation, which will be completed in mid September. At Torrance we will begin a $10 million rooms and public space renovation, which will be completed in Q1 2006. At LAX we will begin renovating the public meeting space in October. That will be completed in early January. We'll begin then a major rooms renovation in 2006 mid-year. At Third Avenue in New York and at Bethesda we will do a rooms renovation in Q1 of 2006.

All of this work and resulting disruption is included in our second half forecast and will be budgeted in 2006. In all of these projects we're managing disruption to minimize financial impact by planning construction around slow periods using careful forecasting to manage financial impact and integrating the property operations to coordinate booking and staffing schedules.

But because this is our first call since going public I believe you'll find it useful if I review our priorities and asset management strategies for maximizing shareholder value. With the IPO looming throughout the first half of 2005 our focus remained on deploying capital and building a well diversified high-quality portfolio of full service and urban limited service hotels.

We did this while also building a corporate structure that would enable us to function efficiently as a publicly-traded REIT in today's environment of high transparency. We've prioritized our needs in asset management and we hired staff accordingly. Our top priorities in asset management were capital expenditure control and capital project management, annual review and approval of the operating budgets and capital budgets, quarterly property review of operations. We have in place rigorous processes in the areas of capital project scope and cost control, thorough evaluation and approval of annual operating and capital budgets and strict scrutiny of operating results.

Our next priority, and one which we've already begun to implement, is a comprehensive investigation of value enhancement opportunities. We expect this initiative to position us decisively to pursue a number of compelling new opportunities within our portfolio such as a spa addition at Griffin Gate, conversion of a specialty restaurant to meeting space in Salt Lake City, review of the food and beverage operations at Sonoma and re-development of the spa facilities at Oak Brook Hills.

Our pipeline currently includes approximately $650 million of hotels. Some of these projects are fairly preliminary and some don't currently meet our underwriting criteria. The acquisition market as you know is very challenging and we'll continue to be disciplined and patient in our acquisitions.

The Marriott sourcing relationship will continue to prove beneficial as will our demonstrated ability to find and close accretive transactions in growth markets with high barriers to entry. Oak Brook Hills and Buckhead, our two most recent acquisitions, are good examples of the benefits from our relationship with Marriott International.

In Oak Brook Hills we worked exclusively with Marriott after sourcing the transaction in the fall of 2004. We underwrote the hotels of Marriott conversion and we were outbid in the first go around. After the initial bidder failed to close the seller came back to us recognizing us as the most likely to close albeit at the lower price. Marriott provided key money and limited yield support in 2006 and 2007 to facilitate the transaction.

In the Buckhead transaction the hotel is not broadly marketed and we were beneficiaries of the owners' decision to offer the hotel to Marriott who in turn offered it to us. We expect the 2006 EBITDA multiple on these two hotels will be less than 10.5 times. At this point, I'll turn things back over to Bill.

Thanks John. As you have heard it's been a very busy and productive year thus far for DiamondRock. As we look ahead we are optimistic that we can continue to successfully execute our business plan and take advantage of opportunities to create value. The lodging recovery remains strong. Our portfolio is performing well and we have the investment capacity to continue to grow in a disciplined fashion. We're happy that all of you are on board for what will certainly prove to be an exciting and rewarding period in our evolution and we look forward to sharing our future successes with all of you. We'd now like to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Will Marks with JMP Securities. Please go ahead.

Hi. Good morning Bill, John, Mark or I guess afternoon out there. Just a question on your capital expenditures and I think when you ran through the list of the properties beginning with Fifth Avenue and then Torrance you gave dollar amount, $6 million Fifth Avenue, $10 million Torrance. I gather those are the two most significant but can you just mention how much you're spending at LAX and Third Avenue and Bethesda?

John you want to take that?

Okay. At LAX the total expenditure will be in the $16 million range. At Third Avenue it will be $4 million and at Bethesda total expenditure will be $5 million, $1.0 million of which will come out of the FF&E reserves. So $4 million incremental from DiamondRock.

It looks like LAX is your biggest project in terms of capital. Is that correct?

Yes. It's a 1,000 room hotel and that's why.

Okay. and so remind me again what you're doing there?

We're doing the public space this fall - at the end of this year and then we're starting a rooms renovation - the public space is the ballrooms and the pre-function space downstairs in the hotel so that won't be disruptive to the rooms. And then the rooms begin in the middle to probably third quarter of '06 and that's a comprehensive soft goods and some bathroom work.

Okay. And just in terms of our modeling, should we -- how should we look at it - $50 million? Is that starting from July 1st or -- you said '05 and '06. I'm wondering how we should put that into our model?

Well it begins in third quarter of this year with $6 million which is incremental money for DiamondRock and then it progresses from there through the, probably, fourth quarter of next year with LAX being probably Q3 and Q4 next year.

Okay all right and just one other question. 10.5 times '06 is the EBITDA multiple on the two acquisitions?

Correct. That's our forecast.

And then in terms of on current year - well I guess you can't really look at that. What about on a cap rate let’s say?

Well of course SpringHill was a new build so there's no cap rate and Oak Brook Hills because it had been marketed as long as it had and had been actually for sale even before that and it was undercapitalized that had a - I don't remember the trailing 12 - it was about $5 million-

$4 million.

It was about $4 million and it really is not representative because of the under capitalization and the under management of the hotel.

Okay that's great. Thank you very much.

(OPERATOR INSTRUCTIONS). Our next question comes from Gustavo Sarago with FBR. Please go ahead.

How you guys doing?

Great.

Can you give some color on the management contracts that you signed with Marriott for the SpringHill Suites and the Oak Brook -- kind of the terms. And then the amount of key money that you got from Marriott?

John, why don't you cover that.

On the SpringHill Suites it's a limited service hotel and we start at a 5% base fee and ramp up depending upon performance at hotel to 6.5%. The incentive management fee is just like our New York courtyards -- 25% over a 12% owners’ priority and that would be 12% on total owners’ invested capital. In Oak Brook it's a little more complicated but it's a 3% base fee and then it's a 20% incentive fee after a 10-3/4 return on total invested capital.

There is a period of time through the 10th year where if Marriott earns a certain amount of money, I believe it's 12% yield on our invested capital they can get an extra 5 basis points of incentive fee. The key money in SpringHill Suites was $500,000. The key money in Oak Brook Hills was $2.5 million and then the yield support for 2006 and 2007 which supports the pro forma NOIs for those years of $6 and $7.1 million is capped out at $2.5 million. So they could theoretically invest $5 million in the Oak Brook Hills Resort.

Okay and the terms of these 20 years plus a certain number or 30 years plus?

SpringHill I believe was 30 years and Oak Brook Hills was 30 years as well.

Okay, thank you guys.

Thank you. Our next question comes from Jeff Donnelly with Wachovia Securities. Please go ahead.

Good afternoon guys.

Hi Jeff.

How you doing? I had a question about the various brands of Marriott that you effectively affiliate with and how you think about them. I'm not asking you to rank them but rather are you indifferent as to - I guess which brand in the system or do you think a little more strategically about them that maybe Renaissance has more unit growth or brand upside than maybe the Marriott brand or SpringHill same thing versus a Residence Inn or Courtyard?

Jeff, I think our primary focus has been Marriott brands and will continue to be over the long haul and the limited service or select service segments we're only focusing on those in an urban environment -- or very much urban like environment. So it'd primarily be Marriott. Renaissance as you know we own two or three at this point - two at this point and we would look very selectively but it's something that as Marriott progresses with the brand we'll take a great deal of interest in.

So I guess it's fair to say it's a little more location or market driven than necessarily which brand per se.

Hey Jeff this is Mark. How are you?

Good.

On SpringHill Suites we spent a lot of time revisiting that brand before we made our purchase in Buckhead and we're actually very excited about kind of what our recent research shows because the unit growth there we think has got a lot of potential to grow nationwide and currently is at a RevPAR disadvantage to Courtyard but we think it's going to close the gap significantly.

We think the fact that most of the SpringHill Suites are new products versus some of the other limited service brands owned by Marriott have a lot more - some of the properties although there being reinvented now there's a number of older properties out there. We think the fact that SpringHill Suites is virtually all new products is going to really be - it's got a lot more upward mobility. So we're excited about that - that brand and that particular hotel -- again for urban locations.

I asked - just so you're aware I think that some people who watch Marriott International some of those brands can actually end up cannibalizing their existing brands but that could also be your opportunity to the extent that it's taking a share towards SpringHill - in this example away from some of the other brands. I wasn't sure if you thought that might be an opportunity for those types of hotels. I guess just as a follow-up to that what other opportunities are you seeing out there, maybe outside of the Marriott relationship? I know you do watch transactions out there. Do you see much of a difference in pricing between transactions brought to you by Marriott and those outside and are there any opportunities from Marriott that you looked at?

Yes, if you look at our transactions thus far we've been able to create in each case some sort of advantage in the transaction. The seven or so that Marriott has helped us create value in are one example but in the Black Acre transaction we were very fortunate in that we understood kind of where the sellers stood with a couple of very big assets that relied on the other four that we bought transacting because he couldn't pay off his mezzanine debt. He couldn't get his debt - he had his debt cross-collateralized. So he needed to do a transaction with all of them.

We were in a great position because Mark had sold him the hotels, understood the financing intimately and so we were just in a great position to be able to buy those at a very favorable EBITDA multiple and in Vale we had worked with those guys for years during the Bachelor Gulch Ritz-Carlton hotel. We knew Vale Resorts very well and we were able to offer them an EBITDA multiple that was greater than what they were getting in the stock market but still by market standards was very low and had that hotel been broadly marketed we've been told by some people that it would have probably have fetched a higher price. Same with SpringHill Suites. So the other transactions that we have not pursued we just haven't seen a way to create value in the transaction that gave us any sort of advantage and some of the cap rates out there today wouldn't be accretive for us.

Having said that we have looked at several non-Marriott branded hotels that would have remained non-Marriott brands and looked very closely at several but as John said we typically wouldn't have a special advantage there and in one case we were outbid.

Thanks guys.

Okay management I'm showing that we do not have any further questions. Actually we do have another one from Gustavo. It's a follow-up from Gustavo Sarago. Please go ahead.

Hey guys can I touch back on some of the CapEx expenditures that you guys are going to have? I guess looking back at the IPO process on the LAX property you had about $7.5 million in the pre-funded CapEx or restricted cash and then additional CapEx of about $2.5 million. How has that project scope changed that now it's about $16 million?

I think the - I'll start this and then Mark can get the data from the IPO but some of the money that we're talking about on the $16 million is increased scope that we think we're going to do particularly in the bathrooms in the hotel. Some of the other money is coming out of the FF&E reserve and Mark can compare it to the rest of the IPO.

Yes look at the perspectives. We had about $7.6 million in the pre-funded CapEx that actually turned out to be, I think, a little bit more than what some of us (ph) thought. And then we had about another $2.4 that we were going to fund - those were for projects through March '06 is how we designed that chart and we're actually I think moving up the rooms rebuild earlier than it was in the original Marriott 10-year plan and the thought is that there's more rate potential there, so we're more anxious to get through the rooms and possibly do some modernization of the bathrooms as well in that hotel and we think there's more untapped upside by moving up the timing on those projects a year or so. That's the biggest variance.

Okay thanks guys.

We have another question from Sam Lieber with Alpine Funds.

Good afternoon gentlemen.

Hi Sam.

Congratulations again on a good initial foray into the public markets. I'm curious regarding the Capex as to how you're looking at these investments now. Not just upon the acquisition of the hotel and obviously getting the desired level of performance in return but since you have already achieved 125% of RevPAR performance on a relative basis, I'm curious as to what you think these new investments will do for the portfolio and have you actually put a return on invested capital number on these new investments?

Well broadly speaking, one comment - general comment and then I'll see if John has some color. Most of the capital that we're embarking on over the next 18 months we really factored in when we acquired the property into the economics. Some of that capital is required to convert a property and bring it up to Marriott's standards. The Courtyard in Manhattan's a good example and Oak Brook will be a second example. So some of that is required just to truly have a Marriott brand in place up to their standards and as I said much of the initial capital we've built into the acquisition performance. Going forward putting aside the normal recurring - keep your property up-to-date we'll be looking at capital projects on a return on investment basis as we do any acquisition. John do you have anything else to add there?

Yes Sam. I think in the case of LAX just by way of example we have seen a 10-point decline in their RevPAR index over the last 12 months. And as we dig into that the reason for that is that each of their primary competitors has accomplished a very significant rooms redo there so in order for them to regain that market share it's necessary to put the capital into the hotel and we decided -- which is true of any hotel -- but we decided to move it up here because it's pretty demonstrable where we can regain market share here.

In the case of Torrance that hotel was underwritten at the beginning as Bill said with a $10 to $12 million incremental CapEx program and in terms of identifying return on investment, there too it's pretty easy to see with some fairly conservative estimates on RevPAR penetration that there's a tremendous ROI on the incremental investment. Some of it is just keeping up normal CapEx but some of it such as the food and beverage outlet changes that we're making and the additional public space we're doing have a clear ROI.

Great. Well thank you, gentlemen.

Sure.

Okay management at this time I'm going to turn the conference back over to you for any closing comments you may have.

Great thank you. Well thanks again to all of you for your continued interest in DiamondRock. We're committed to consistent and open communications with all of our stakeholders and we look forward to talking with you again on our third quarter conference call. Good bye.

Ladies and gentlemen that concludes today's teleconference. If you would like to listen to a replay of today's conference you may dial into 303-590-3000 or 1-800-405-2236 followed by the access code of 11035850 and then followed by the pound sign. Once again those numbers are 303-590-3000 or 1-800-405-2236 followed by the access code of 11035850 and then followed by the pound sign. Thank you for your participation in today's conference. At this time you may disconnect.